Tag Archives: Investment

WHY YOU TAKE ON TOO MUCH Planning Fallacy

Posted on by under Behavioral Finance

Even though you realize that most of your previous endeavors were overly optimistic, you believe in all seriousness that, today, the same workload – or more – is eminently doable. Daniel Kahneman calls this the planning fallacy.

We generally overestimate our capabilities so that we think that we can perform lots of work in a stipulated time frame. This fallacy leads to being liberal with a time target, and cost budget to fulfill projects in organizations. But later on, this will need to revise further. Sometimes, constant planning keeps us away from thinking about any unexpected events to occur. We need to spare good time for thinking about the occurrence of an unexpected event.

Business – When forecasting the outcomes of risky projects, executives too easily fall victim to the planning fallacy. In its grip, they make decisions based on delusional optimism rather than on a rational weighting of gains, losses, and probabilities. They overestimate benefits and underestimate costs. They spin scenarios of success while overlooking the potential for mistakes and miscalculations. As a result, they pursue initiatives that are unlikely to come in on budget or on time or to deliver the expected returns—or even to be completed.

Investment – Similar happens while we plan our investment journey, we overestimate the results of what we have planned and ignore the costs, and uncertainty associated with it. When we plan an investment, we think that the investment will perform similarly to what we planned. But we forget that there can be a black swan event which can hurt our planning. So that we should not close our eyes from occurring of black swan events while making planning.

This entire series will be reviewed with various examples from books which are “Thinking, Fast and Slow” and “The Art of Thinking Clearly“.

BE WARY WHEN THINGS GET OFF TO A GREAT START Beginner’s Luck

Posted on by under Behavioral Finance

At some point in your life, you’ve won a game you’ve never played before or witnessed a young child say or create something with worldly depth. These are both examples of events we attribute to something called beginner’s luck as if chance caused them to happen. – Lifehacker

Investment – When someone starts investing and he has reaped good returns on the initial investment. Then he starts thinking that he pursues an above-average skill and knowledge which has rewarded him well. This is known as beginner’s luck and that makes novice investors blind to making wise decisions and efforts.

The stock market always checks novice investors with beginner’s luck and those who can come out of the trap, can have a better chance to survive further. We should focus on long-term success rather than one year or a month of success. Sometimes, novice investors earned an above 50% return on their investment and they start thinking of themself as talented as Mr. Warren Buffett. Nowadays, one-two correct bets promote them from analysts to fund managers. They started to manage the funds of family and friends.

We should understand that the stock market is a sea and, we need to have remained lifelong students to walk in the depth of the sea. Not a master, because the master is always a market.

We should not get excited by one or two of success but have to remain grounded by focusing on long-term success. If we keep meeting success during a longer horizon then we can consider ourselves mature investors.

This entire series will be reviewed with various examples from books which are “Thinking, Fast and Slow” and “The Art of Thinking Clearly“.

11 – Current temptation, future frustration

Posted on by under Current temptation, future frustration

The eleventh part of the Series is “Current temptation, future frustration”. This series is based on the companies which are currently darling of the market and many trying to catch such opportunities but it has a probability to become a reason for future frustration. It can wipe out the majority of gains in wealth. I am trying to put some of the number-crunching facts by which we can identify ongoing issues in the companies and can be saved our wealth.

I am starting this article with one of the company which is engaged in the business of providing IT Consulting and Software Development Services has a 52 weeks low price of Rs.1.68 and LTP is Rs.7.59. This company has rewarded ~4.52x of return in a year.

Let’s start looking at the numbers.

We can see that sales of the company keeps falling losses at the operating level and not earning profits.

We can see that higher receivable days and lower payable days where we can say that almost 3.96 years of receivables.

The company has ~87% & 89% of other current assets to staff advances in FY21 & FY20 respectively. These advances keep growing and do not get repaid.

We can see that lower return ratio and worsen over a period as financial worsening. Also, the company has worsened with the worst performance.

We can see that majority of borrowings from related parties and interest expenses are very lower still the company cannot able to perform well.

This entire series is based on past available data and ignored the future development in companies and the stock market always looks at the future.

WHEN YOU HEAR HOOFBEATS, DON’T EXPECT A ZEBRA Base-Rate Neglect

Posted on by under Behavioral Finance

Base-rate neglect: a disregard of fundamental distribution levels. The majority of the people ignore statistical data to conclude.

Representativeness—ignoring both the base rates and the doubts about the veracity of the description.

We focus on the other aspects rather than statistics for making a decision. For example, selecting a player based on his build and look rather than his past performance statistics.

Selection of investment by story prevailing at street rather than the past performance of the company. This falls under this bias.

When the stereotypes are false and the representativeness heuristic will mislead, especially if it causes people to neglect base-rate information that points in another direction. Even when the heuristic has some validity, exclusive reliance on it is associated with grave sins against statistical logic.

Investment – We know that very few companies survive after 10 years of operations. So, when we have seen any companies that come as a next google, Facebook, Amazon, Infosys, Dmart, etc. then we should have data which suggests that if the company has not seen 10 years of journey, then we should stay away from it.

When we make any decisions, we should not avoid statistical data. Because avoiding such data can misguided us and we ended up taking miserable decisions.

It is also logical that low return ratio companies will not be going to give a higher return to us (else we have bought it at deep discount-then also the lower probability to give multifold returns), then also when we have any good narrative about the company, we start chasing it. Never avoid the voice of numbers because it can tell us a real story.

We focus on the stories of management, industry, economic growth potential but forget to focus on the past performance of the company. If past performance says that the company is not strong enough to perform then enough external opportunities also cannot do anything. But people follow stories and avoid base rates or probabilities and end up with blunders.

This entire series will be review with various examples from books which are “Thinking, Fast and Slow” and “The Art of Thinking Clearly“.